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Guest Post: China – Economic Catastrophe Unfolding

Guest Post: China – Economic Catastrophe Unfolding

Submitted by Terence Doherty, guest author (via Phil’s Stock World)

Here’s some recent news about the real estate markets in China. I think it is fascinating watching how these things unfold. This proves once again that the lesson of history is that we don’t learn the lessons of history.

I predicted over 2 years ago that the Chinese stock markets would implode dramatically, much to everybody’s disbelief and skepticism. It began a few months sooner than I thought, but, that is exactly what has happened. Now for the last year or so, I have predicted that things will get VERY bad in the Chinese real estate markets over the next several years. Again, most people I have talked to about this (especially Chinese) have almost universally dismissed this notion as absurd.

But this is not just a guess. When you read these articles, you will see just some of the evidence that leads me to this conclusion. There are a lot of data on this, and most of it comes from statistics issued by various Chinese government agencies. But it is not advertised by the mainland press or TV. So, many Chinese are not at all aware, and think that everything will soon be wonderful, because that is pretty much what they constantly hear from the official media.

That is one thing I noticed immediately about China: there is a constant barrage everywhere you turn—-TV, advertisements, magazines, newspapers, billboards, etc.—-that essentially suggests that everything is wonderful and getting more wonderful all the time, and everybody is just happy, happy, happy, and China is getting better and better and stronger and stronger. I was really struck by this. It was like living in a never-ending infomercial. Maybe some go to China and are not very aware of this, but to me it was like a constant din.

Actually, at least some of this data is readily available on the mainland. But it requires digging. The official news agencies like Xinhua and the People’s Daily just keep repeating the same mindless mantra in endlessly varying ways every day: “Everything is good, there are only a few small little problems, but the Motherland is unstoppable and


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PIMCO Does Not Believe In Relative Value

PIMCO Does Not Believe In Relative Value

In the accompanying presentation, it is easy to see why Bill Gross’ PIMCO is highly bullish on credit of any variety. As the table below demonstrates, taken straight out of the biggest bond fund’s May 2009 presentation “Investing for the Journey and the Destination: What it means across the Capital Structure” PIMCO doesn’t see any overvalued instruments in the credit realm: MBS, IG, EM and HY/Loans all have wonderfully green and positive metrics in the valuation column. As for products, while PIMCO believes that fundamentals, technicals, valuations and policy support are all “positive” exclusively for Mortgage Backed Securities, in essence this is merely window dressing for justifying to investors (and the SEC) that after every 7 am conversation with Tim Geithner, in which the latter tells Bill that he will buy yet another $20-30 billion in MBS that week, that PIMCO will be frontrunning the taxpayers in purchasing a boatload of Fannie 30 Years.

Yet with all the greenery, following the recent collapse in mortgages, and the explosion of the 30 Yr – 10 Yr UST spread, Bill may reconsider changing some of the exuberant optimism. To wit: Mr Gross may want to learn about such credit phenomena as cumulative losses and loss severities: both of which may precipitate some of the greenery into shrinkage. As Zero Hedge pointed out earlier, assuming 10 cent recoveries on upcoming defaults, the extrapolated cumulative losses could be dramatic: up to 50% of HY names may end up in default (of course that is backing into an estimate based on market trading levels of HY12). But even at half this loss level, the case will end up being that 1 out of 4 names will pay at most 2-3 bi annual coupons before payments stop, and the hot potato will have to find the most gullible investor. Of course with over a trillion notional in all possible credit instruments, PIMCO will perpetuate the “all is great” fallacy for as long as possible because as much as it tries, there is simply not a fool with a large enough balance sheet to purchase all of Gross increasingly distressed securities.

Hat tip Richard





WILL FURTHER COST CUTS LEADER TO Q2 OUTPERFORMANCE?

WILL FURTHER COST CUTS LEADER TO Q2 OUTPERFORMANCE?

cost cuttingCourtesy of The Pragmatic Capitalist

At the end of the day it’s still earnings that matter most.  As the expectation ratio has shown, the stock market has remained resilient primarily due to the fact that expectations for earnings have become very low and more corporations are outperforming the low hurdles.   But a look under the hood has shed some light on the true strength of these earnings.   We’ve seen a common trend of late.  Companies are missing top line estimates and handily beating bottom line estimates.  The two most recent examples of this phenomenon were RIMM and FedEx.  72% of the S&P 500 reported revenues that were lower than the same quarter last year.  As corporations shed workers and other costs they’re actually able to outpace their revenue declines with cost cuts.  While we’re still seeing very weak revenues figures (which is representative of the weak economic landscape) we’re actually seeing some margin stabilization and subsequently better than expected bottom line growth.  This chart from JP Morgan shows the trend at hand:

mrgins

GDP is expected to climb substantially this quarter.  We’re also seeing some stabilization in overall economic productivity.  Meanwhile, on the cost side we’re continuing to see very low levels of hiring, low labor costs, low business spending and inventories.  Revenues are down just 17% for the overall S&P 500 on a year over year basis, but as you can see in the following two charts spending and inventories have nosedived:

costs

As JP Morgan notes, there is no evidence that this is sustainable or positive for the markets in the long-term though:

Corporate defense of profits and financial standing, that is continuing in the current quarter, is apparently being rewarded in the credit markets. Corporate spreads over Treasuries and corporate bond yields have continued to decline in the past several weeks even as other longer-term market interest rates were rising.
The implications of corporate financial performance for economic growth over the coming year is uncertain. Business will emerge from recession in better financial health than compared to exits from past recessions, and with internal funds running well above capital spending. These conditions might argue for a relatively robust corporate expansion.

But for this to happen, the extreme caution that produced these financial results has to change. And there is no


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ROBERT PRECHTER EXPECTS CORRECTION

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ROBERT PRECHTER EXPECTS CORRECTION

Courtesy of The Pragmatic Capitalist

Like Steven Leuthold, Prechter is expecting a short-term correction followed by a resumption of the rally:

 

 


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Flow of Funds Report Offers Hard Evidence of Deflation

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Flow of Funds Report Offers Hard Evidence of Deflation

Courtesy of Mish

I am not sure if this was his intent, but recent analysis of the Flow of Funds Report by Martin Weiss eloquently makes the case for deflation.

In New, Hard Evidence of Continuing Debt Collapse! Martin Weiss Writes …

While most pundits are still grasping at anecdotal “green shoots” to celebrate the beginning of a “recovery,” the hard data just released by the Federal Reserve reveals a continuing collapse of unprecedented dimensions.

It’s all in the Fed’s Flow of Funds Report for the first quarter of 2009, which I’ve posted on our website with the key numbers in a red box for all those who would like to see the evidence.

First and foremost, the Fed’s numbers demonstrate, beyond a shadow of a doubt, that the credit market meltdown, which struck with full force after the Lehman Brothers failure last September, actually got a lot worse in the first quarter of this year.

click on chart for sharper image

Open Market Paper: Instead of growing as it had in almost every prior quarter in history, it collapsed at the annual rate of $662.5 billion. (See line 2.)

Banks lending: Credit markets [collapsed] at the astonishing pace of $856.4 billion per year, their biggest cutback of all time (line 7).

Nonbank lending: (line 8 ) pulled out at the annual rate of $468 billion, also the worst on record.

Mortgage lenders: (line 9) pulled out for a third straight month. (Their worst on record was in the prior quarter.)

Consumers: (line 10) were shoved out of the market for credit at the annual pace of $90.7 billion, the worst on record.

The ONLY major player still borrowing money in big amounts was the United States Treasury Department (line 3), sopping up $1,442.8 billion of the credit available — and leaving LESS than nothing for the private sector as a whole.

Bottom line: The first quarter brought the greatest credit collapse of all time.

Excluding public sector borrowing (by the Treasury, government agencies, states, and municipalities), private sector credit was reduced at a mindboggling pace of $1,851.2 billion per year!

And even if you include all the government borrowing, the overall


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Trucks Sit Idle; Rail Traffic Horrific

Courtesy of Mish

Trucks Sit Idle; Rail Traffic Horrific

The weekly Railfax Rail Carloading Report still looks grim. Here are a couple of charts.

Total US Rail Traffic

click on chart for sharper image

Total Industry Charts (US, Canada and Mexico)
Year over Year Percent Change – 13 Week Rolling Averages

click on chart for sharper image

13-week moving averages are still moving lower, with no apparent end in sight. The first chart shows the one relatively bright spot is coal. I hear the same message about coal from trucker friends.

Idle Trucks

"TF" writes:

Mish,

I travel a number of routes regularly with my job and one site I pass amazes me. It is a local trucking company property. In early summer 2008 there were maybe 100 total trucks and trailers. Today, there is not much room left in a 12 acre area with 100s for trucks and trailers can not guess the number of trailers stacked 3 to 4 high.
I had heard through a trailer dealer that this trucking company solely purchased equipment to move wind energy projects for a number of years and this year canceled all equipment orders.

I also pass by a switchyard for a BNSF line between Seattle and Chicago once a month. The switchyard is a transfer point for the main line to a local. Freight would wait until there was an opening on the local line or an available engine. Prior to July/August 2008 the yard would have various car carriers, containers and other freight along side the coal cars destined for the power plants. Today only the coal cars are parked there. There is no waiting, except for coal.

TF

Competition Intense

FleetOwner is reporting Truck Freight Down Until 2010.

Truckers larger and small will need to keep their belts tightened into the early part of next year before they can expect to see freight volumes start increasing, according to the latest industry analysis compiled by FTR Associates.

In a conference call with reporters last week, FTR analysts noted that for freight to start recovering, it must "reach a bottom first" and they predicted the bottom will be reached in the third to fourth quarter of this year. That will lead to a recovery in freight volume to begin sometime in the first quarter of 2010.

"I


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Toyota Set To Become Top Dog In The U.S.

Courtesy of Tom Lindmark, But Then What?

Toyota Set To Become Top Dog In The U.S.

Depending upon your philosophical bent, this is either good news or another sign that the Apocalypse is Top Dog, Toyotanear.

The WSJ is reporting that Toyota is slated to take over the title as the number 1 seller of light vehicles in the U.S.

The bankruptcies of General Motors and Chrysler are changing the landscape of the auto industry. The two U.S. companies are shuttering plants, shedding dealers and reducing their product lines.

As a result, Toyota Motor will become the largest seller of light vehicles in the U.S. It has held the top spot globally since last year.

The Japanese auto maker won’t be the only beneficiary of the two companies’ woes. But in terms of status, market clout and bragging rights, Toyota will be the No. 1 winner.

Its share of the North American light-truck and car market probably will rise to around 20% from 18.4%. GM will end up in second place with 13% to 16% — with Ford hot on its tail.

Although Toyota stock doesn’t change hands directly in the U.S., the company’s American depositary shares (TM), which represent them, are listed on the New York Stock Exchange.

And, at a recent price of around $76 — about $30 below their 52-week high — they’re a good bet for long-term investors.

The Journal suggests that the stock might be a good long-term buy. They point out that analysts suggest it could hit $115 and that it hit $137 a couple of years ago. Maybe, but just a caveat. Toyota and others now have the most fearsome of competitors  – government owned companies. In the long run that probably means success for the competitors as political decisions trump business common sense. In the short run it could be formidable as the government does whatever is necessary to prove it didn’t make the stupid decision that everyone acknowledges it did.

Buy the stock at your peril.


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The obtuseness of macroeconomics

Courtesy of Benign Brodwicz’s The Animal Spirits Page 

The obtuseness of macroeconomics

By Benign Brodwicz

Consider The Economist’s Romer roundtable:  Debt will keep growing.

Not one macroeconomist acknowledges what I believe to be the true cause of the current collapse of effective demand, the extreme skewness of the income distribution and the attendant indebtedness and inability to spend at previous levels of the bottom half or better of the household income distribution.  My reference rant on this subject is here.  [Read the rant too, it's a good one. - Ilene]

The macroeconomists keep talking about “monetary stimulus” and “fiscal stimulus” as if they’re talking about stepping on the accelerator of a gasoline internal combustion engine.  Except that the engine is running on one cylinder, and if they “prime” the engine, all the gasoline is only going to fire on one cylinder, the one that’s getting the gas—in terms of this metaphor, the rich folks at the top of the currently neo-feudal pecking order.

The fiscal and monetary stimuli of the Great Depression failed to make the income distribution more equal, and failed to reduce unemployment to reasonable levels.  Most households weren’t participating in the flow of income to a sufficient degree for that to happen.

It’s time for the policymakers to realize that the economy is in the middle of a vast transition from a debt-financed consumption-heavy economy to one that is higher saving and more investment oriented.  That’s a big change, one that will take years.  Businesses aren’t going to want to invest in capital formation for consumer markets when they won’t know what the prospective returns are until we burn off some of our excess capacity and consumption patterns stabilize, in sum and in composition, in some new configuration. 

It took World War II to equalize the American income distribution last time, a frightening thought.  I have no idea what it will take this time.

The best macroeconomic policy right now, and the only one we can afford, is to provide honorable workfare to the growing ranks of the unemployed—in part so that they do not become radicalized and alienated from America—and health benefits so that we don’t compound the losses of the current slump with avoidable sickness.

John Maynard KeynesMacroeconomics in toto—the academic work plus the way it has entered policy—is


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Behind the Sense of Urgency

Michael Panzner introduces a post from Prudent Investor on price inflation in food prices, featuring a chart from the Economist comparing different countries. 

Behind the Sense of Urgency

By Michael Panzner at When Giant’s Fall

In yesterday’s post, "A Hunger for Food Security," I highlighted an article detailing the global scramble to acquire farmland and bolster food security.

Another post published today at the Prudent Investor Newsletters blog, "Chart: Global Food Price Inflation," points to a report in The Economist that might help explain the sense of urgency driving at least some of those efforts.

Inflation’s impact is always relative. And it can be seen in food prices across different nations.

Economist's chart on food inflation

According to the Economist,

"Changes in global food prices are affecting some countries much more than others. Despite a big fall from peaks in 2008, food-price inflation remains high in places such as Kenya and Russia. In China, however, falling international commodity prices have been passed on to consumers faster. The price of food, as measured by its component in China’s consumer-price index, rose by more than 20% in 2007 but fell by 1.9% in 2008 and by a further 1.3% in the past three months alone."

Of course, there are also many factors that gives rise to these disparities, aside from monetary and fiscal policies (taxes, tariffs, subsidies, etc…), there are considerations of the conditions of infrastructure, capital structure, logistics/distribution, markets, arable lands, water, soil fertility, technology, productivity, economic structure and etc.

Our concern is given the present "benign state of inflation", some developing countries have already been experiencing high food prices, what more if inflation gets a deeper traction globally? Could this be an ominous sign of food crisis perhaps?


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On The Uselessness Of LIBOR

On The Uselessness Of LIBOR

Most financial experts are aware that the only reason the economy has not yet collapsed entirely, is due to the trillions in governmental safeguards and industrial subsidies. Zero Hedge has written extensively on the topic, and it is nowhere more obvious than here, that virtually the entire financial system is backstopped by explicit and implicit guarantees. And in true pro-cyclical fashion, the expectation for permanent governmental crutches can be best seen in some of the same metrics that in the post-Lehman days markedly went off the charts, most notably the LIBOR rate. From record wides several months ago, LIBOR, which is critical as it is the reference risk rate for trillions in assorted product classes, has collapsed to an unprecedented low. The rate drop has manifested in an inversion of the 1 Yr UST – 1 Yr LIBOR spread, with the latter clearing 100 bps inside of the former: a topic covered in detail previously by reader Gary Jefferey.

James Bianco of Arbor Research has some interesting comments, discussing the immediate future of LIBOR as a true predictor of the interbank lending market, especially in light of the BBA’s decision to expand the 16 bank LIBOR reporting syndicate as even it has realized that market participants have lost faith in the impartiality and objectivity of LIBOR. In a nutshell, Bianco notes that LIBOR indications by TARP vs non-TARP bank demonstrates a notable schism in risk perception: it is odd (actually, not that odd) that this has not changed notably since Zero Hedge discussed this topic five months ago.

From Arbor Research’s piece:

The Wall Street Journal – Libor No Longer Just London

The British Bankers’ Association said Thursday it has started to allow banks operating outside London to contribute quotes for its unsecured interbank lending rates in a bid to keep its rates as representative of bank borrowing costs as possible…The change in definition will open up the number of banks to include those that are highly active in the London money markets but deal out of their domestic headquarters. This comes at a time when some banks on the contributing panels have merged and some foreign banks have reduced their overseas


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Zero Hedge

Algos Getting Concerned Low Volume Levitation May Not Work Today

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

It has been exactly six days in which algos, reversing the most recent drop in the S&P with buying sparked by a casual Nikkei leak that the BOJ may, wink wink, boost its QE (subsequently denied until such time as that rumor has to be used again), have pushed the market higher in the longest buying streak since September, ignoring virtually every adverse macroeconomic news, and certainly ignoring an earnings season that is set to be the worst since 2012. Today, the buying streak may finally end on rumors even the vacuum tubes are scratching their glassy heads if more buying on bad or no news makes any sense now that even the likes of David Einhorn is openly saying the second tech bubble ha...



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Phil's Favorites

China Manufacturing Output and New Orders Contract Once Again

Courtesy of Mish.

Chinese manufacturing remains in contraction for 2014. Output and new orders were down for the 4th consecutive month, but at a slightly reduced pace according to the HSBC Flash China Manufacturing PMI.



Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co - Head of Asian Economic Research at HSBC said:

“The HSBC Flash China Manufacturing PMI stabilised at 48.3 in April, up from 48.0 in March. Domestic demand showed mild improvement and deflationary pressures eased, but downside risks to growth are still evident...



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Chart School

STTG Market Recap April 22, 2014

Courtesy of Blain.

We continue in this "V shaped" move off last week's touch of the 200 day moving average on the NASDAQ.  The S&P 500 gained 0.41% and the NASDAQ 0.97%.  The indexes are nearing overbought near term so a day or two of rest would serve the bulls well to try to attempt a new leg higher.  In economic news existing home sales hit 4.59 million in March, versus a 4.55 million estimate.

In terms of the indexes the S&P 500 stalled at the trend line that connected the lows of summer 2013; some congestion lies ahead at year highs.

The NASDAQ has come back from deeply oversold conditions as this index is heavy with biotech and momentum stocks.  The dotted blue line is the previous high; since early March we have not seen the NASDAQ make...



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Market Shadows

Soy Numero Uno

Soy Numero Uno

By Paul Price of Market Shadows

Bunge Limited (BG) is the world’s largest processor of soybeans. It is also a major producer of vegetable oils, fertilizer, sugar and bioenergy.

When commodities got hot in 2007-08, Bunge’s EPS shot up and the stock followed, rising 185% in 19 months.

The Great Recession took its toll on operations, dropping EPS to a low of $2.22 in 2009.  Since then profits have recovered.  They ranged from $4.62 - $5.90 in the latest three years. 2014 appears poised for a large increase. Consensus views from multiple sources see BG earning $7.04 - $7.10 this year and then $7.83 - $7.94 in 2015.

...



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Option Review

Casino Stocks LVS, WYNN On The Run Ahead of Earnings

Shares in Las Vegas Sands Corp. (Ticker: LVS) are up sharply today, gaining as much as 5.7% to touch $80.12 and the highest level since April 4th, mirroring gains in shares of resort casino operator Wynn Resorts Ltd. (Ticker: WYNN). The move in Wynn shares appears, at least in part, to follow a big increase in target price from analysts at CLSA who upped their target on the ‘buy’ rated stock to $350 from $250 a share. CLSA also has a ‘buy’ rating on Las Vegas Sands with a $100 price target according to a note from reporter, Janet Freund, on Bloomberg. Both companies are scheduled to report first-quarter earnings after the closing bell on Thursday.

...

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All About Trends

Mid-Day Update

Reminder: David is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Sabrient

What the Market Wants: Market Poised to Head Higher: 3 Stocks to Consider

Reminder: Sabrient is available to chat with Members, comments are found below each post.

Courtesy of David Brown, Sabrient Systems and Gradient Analytics

Yesterday, the market continued its winning ways for the fifth consecutive day.  The S&P 500 closed within 1% of its all-time high, and the DJI was even closer to its all-time high.  Healthcare, Energy and Technology led the sectors while Financials, Telecom, and Utilities finished slightly in the red.  All three sectors in the red are typically flight-to-safety stocks, so despite lower than average volume, the market appears poised to make new highs.

Mid-cap Growth led the style/caps last week, up 2.87%, and Small-cap Growth trailed, up 2.22%. This week will bring well over 100 S&P 500 stocks reporting their March quarter earn...



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OpTrader

Swing trading portfolio - Week of April 21st, 2014

Reminder: OpTrader is available to chat with Members, comments are found below each post.

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here...



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Stock World Weekly

Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's this week's Stock World Weekly. Click here and sign in with your PSW user name and password, or sign up for a free trial.

...

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Digital Currencies

Facebook Takes Life Seriously and Moves To Create Its Own Virtual Currency, Increases UltraCoin Valuation Significantly

Courtesy of ZeroHedge. View original post here.

Submitted by Reggie Middleton.

The Financial Times reports:

[Facebook] The social network is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others, according to several people involved in the process. 

The authorisation from Ireland’s central bank to become an “e-money” institution would allow ...



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Promotions

See Live Demo Of This Google-Like Trade Algorithm

I just wanted to be sure you saw this.  There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.

If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.

Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.

Follow this link to register for their training webinar where they’ll demonstrate the tested and proven Algorithm powered by the same technological principles that have made GOOGLE the #1 search engine on the planet!

And get this…had you done nothing b...



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Pharmboy

Here We Go Again - Pharma & Biotechs 2014

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

Ladies and Gentlemen, hobos and tramps,
Cross-eyed mosquitoes, and Bow-legged ants,
I come before you, To stand behind you,
To tell you something, I know nothing about.

And so the circus begins in Union Square, San Francisco for this weeks JP Morgan Healthcare Conference.  Will the momentum from 2013, which carried the S&P Spider Biotech ETF to all time highs, carry on in 2014?  The Biotech ETF beat the S&P by better than 3 points.

As I noted in my previous post, Biotechs Galore - IPOs and More, biotechs were rushing to IPOs so that venture capitalists could unwind their holdings (funds are usually 5-7 years), as well as take advantage of the opportune moment...



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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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